On 18 November 2016, GC100 and Practical Law Corporate hosted a round table discussion on inside information.

During their work on the Market Abuse Regulation (MAR), GC100 members have been revisiting the definition of inside information, in particular in the context of financial results announcements, and the round table discussion was an opportunity for members of the GC100 executive committee and members of the GC100 MAR working group to exchange ideas and practices, and also to hear the views of lawyers from Freshfields Bruckhaus Deringer LLP and Slaughter and May.

The discussion was attended by 11 GC100 members, as well as:

The discussion covered the definition of, and determining whether information is, inside information, the ability to delay disclosure of inside information, market practice as regards results announcements and general changes in practice as a result of MAR. In summary, the following key points were made:

This article sets out in more detail the main areas discussed by GC100 members and representatives from Freshfields and Slaughter and May.

For the purposes of MAR, inside information is information that:

(Article 7(1)(a) and 7(4), MAR.)

Slaughter and May regards "price sensitivity" as the key test. It noted that, whereas under the FSMA definition it was possible to take the position that it was necessary for the information in question to be likely to (i) be used by "a reasonable investor" as part of the basis of his investment decision AND (ii) have a significant effect on the price of the issuer's securities (although this was not accepted by the FCA), this has been superseded by the Upper Tribunal's decision in the case of Ian Charles Hannam v Financial Conduct Authority [2014] UKUT 233 (TCC) and under MAR that position is no longer tenable.

The 10% rule of thumb for the price movement of securities has not been safe for many years and, following the decision in Hannam, the reasonable investor test must be applied taking into account the likely effect of the information on the price of listed securities. In terms of what should be considered "significant", the judgment states that the reasonable investor would likely take account of information which may have a "non-trivial" effect on price. In relation to information about things that have not yet occurred, the Upper Tribunal concluded that this did not mean "more likely than not" but rather that there must be a "realistic prospect" of those events occurring.

Slaughter and May noted that, even if the event, information or transaction does not have a "realistic prospect" of occurring, each of the individual steps on the path must be assessed (for example, instructing a head hunter in respect of the appointment of a new CEO) (Article 7(2), MAR). An important lesson from Hannam is that a judgment that information is not inside information must be capable of being justified in the context of both announcement obligations and the restriction on insider dealing.

Several GC100 members agreed that there is a risk that, if a company adopts a low threshold for what it regards as inside information, without sufficient analysis and certainty, it may make it difficult to take a different position in the future. Consequently, it may find itself in a situation where it is unnecessarily restricted, for example, from carrying out share buybacks or making grants under share plans on regular cycles.

One GC100 member confirmed that, for its company, the default position was that it would label, and therefore announce, a piece of information as inside information if there was absolute certainty that that information would move the share price by a reasonable amount. Another GC100 member believed that the change of CEO would not necessarily be inside information.

In terms of results, it was agreed that, during their preparation, companies should keep under review whether the reported results are likely to be in line with consensus and, if not, consider whether an announcement should be made. It was noted that the announcement of financial results is often followed by a share price movement but the key point is to understand why the share price will move (or has moved) and to appreciate that this may not be because of the results themselves.

Slaughter and May stated that some financial results are clearly inside information (for example, results outside consensus requiring a profit warning), some are clearly not and that some fall within the grey area of "maybe" being inside information (for example, results within consensus that are sufficiently complete and could conceivably be used by a reasonable investor as part of an investment decision). Freshfields noted that, if the intention had been for all financial results to be categorised as inside information, then there would not have been a need to introduce "closed period" dealing restrictions in MAR as the insider dealing prohibition in MAR would have stopped any dealings by PDMRs based on results. For market practice regarding results announcements, see Market practice: results announcements.

In terms of information generally (not just financial results), one GC100 member acknowledged that the "maybe" case is actually very difficult to deal with, as MAR requires you to be black and white. Even if information "may" be inside information, the company still has to pin point the exact date and time when the information actually becomes inside information.

Slaughter and May confirmed that ultimately it is a judgment call: can the company definitively conclude that the information does not amount to inside information and is it completely comfortable defending its decision? Where information, which is potentially inside information, is considered by a company but it is decided that the information does not amount to inside information, the company should clearly document the reasons and processes for coming to that decision. If it is treated as inside information but not announced, the justification for delay should be recorded.

Slaughter and May confirmed that there is no reason for companies to change their practices as regards the disclosure of inside information as a result of MAR. The definition of "inside information" hasn't changed, however what has changed is that companies must:

GC100 members generally acknowledged that, as a result of the changes made by MAR, they have taken the opportunity to review, refresh and reinforce their existing procedures around (i) access to results information (the number of persons with access to the information has been tightened) and (ii) disclosure (determining whether or not something amounts to inside information and whether the company has a disclosure obligation is being considered more frequently, usually by the disclosure committee).

The disclosure to the public of inside information can be delayed if each of the following is satisfied:

(Article 17(4), MAR.)

Freshfields commented that the FCA has set out two conflicting views regarding the delay of inside information. On the one hand, in its Technical Note, Periodic financial information and inside information (UKLA/TN/506.2), the FCA notes that:

On the other hand, in paragraph 474 of the Upper Tribunal's decision in Hannam, the Upper Tribunal notes, obiter dicta (adopting the argument put to the Upper Tribunal by the FCA), that:

Freshfields is of the view that, following the FCA’s post-Hannam consultation on the ability of an issuer to delay the announcement of inside information, the FCA has not changed its position in this area and in an enforcement context would be likely to distinguish its position in Hannam. It was noted that the Technical Note had remained in place and that currently the FCA was only proposing to make non-substantive changes to it to reflect the replacement of the Market Abuse Directive with MAR. Slaughter and May attaches more significance to the approach that the FCA took in Hannam and believes that it would be hard for the FCA to explain a tougher line on the ability to delay, not least because it declined requests to clarify the position.

In Freshfields' view, pending guidance from the FCA or ESMA, where companies categorise results as containing “inside information”, they should follow the FCA's guidance in the Technical Note. This does not necessarily mean that the results themselves have to be announced early, however a profit warning or other disclosure of the relevant event or fact will be required.

Slaughter and May suggested that companies may prefer to be more conservative on the application of the reasonable investor test and rely on the ability to delay adopted in Hannam. Under this approach, the announcement of results (that are in line with consensus and which are determined to amount to inside information) may be delayed until a scheduled reporting date as a company has a legitimate interest in announcing its results in an orderly and planned manner, making reasoned and measured statements in order to disseminate information to the market effectively. This ability is subject to the other provisions of Article 17(4) of MAR being satisfied. Slaughter and May highlighted that this view does not necessarily conflict with the FCA’s guidance as use of the word "merely" would refer to a situation where the relevant results' statement and presentation are in final form and the company is in a position to properly announce and adequately explain its results.

It was noted that, in its Guidelines on delay in the disclosure of inside information (ESMA 2016/1478), ESMA states that where a company does not meet previously announced financial objectives, this would be an example of a delay that would mislead the public. Freshfields highlighted that the concept of "financial objectives" is very broad and that it extends more widely than a profit forecast.

(Note that, since the round table discussion, the FCA has published its consultation paper CP16/38 which, among other things, proposes to delete the last sentence of DTR 2.5.5G (“However, the FCA considers that, other than in relation to impending developments or matters described in DTR.2.5.3G or Article 17(5) of the Market Abuse Regulation, there are unlikely to be other circumstances where delay would be justified”) as it is not compatible with the ESMA guidelines that state that the examples of "legitimate interests" are non-exhaustive. In the FCA’s view, this leaves open the possibility for the list being amended in the future. The FCA does not, however, expect the proposed changes to have a negative impact on the type of transparency that it expects the regime to produce, or the quality or number of disclosures, compared with its position in recent years.)

Several GC100 members acknowledged that the process for delaying the disclosure of inside information must be carefully managed, especially for global companies operating in various time zones, whose shares are listed on more than one exchange.

One GC100 member stated that it had been considering with its advisers whether it might be in possession of inside information and the timing of any announcement, particularly in the context of the new rules around delaying disclosure. The member was advised that, if a company has inside information on a Sunday (or at another time when markets are closed), it was now thought that it cannot wait until markets are next open to announce in the normal way via RNS. Instead, the expectation was that the company would need to announce immediately through its own website and through the websites of national newspapers, even though it was felt that it would not be terribly useful for the market to announce inside information at a strange time when almost no-one would be around to answer any queries about it, and that investors might find cause for complaint if this process were followed.

Freshfields confirmed that, on a broad analysis of results announcements made since 3 July 2016 by FTSE 100 companies, approximately 80% of companies had not labelled their results as containing inside information. It was noted, however, that a limited number of companies had announced inside information during the preparation of their results and that, therefore, when such companies announced their actual results, such results did not contain inside information.

Freshfields further confirmed that, from its analysis, it appeared that a similar approach was being taken by FTSE 250 companies. In general, it was noted that companies were not identifying their quarterly results as containing inside information.

As companies generally tend to err on the side of caution as regards regulatory matters, one GC100 member felt that it was likely that some of the companies falling within the 20% that had labelled their results as containing inside information, would have taken the cautious approach believing that their results "may" be inside information and labelled them as such, even though they may not have actually contained any inside information.

It was thought that a small number of the companies falling within the 20% may have only categorised their results as being “inside information” the night before they were published. Those companies were therefore announcing that inside information “as soon as possible” in accordance with MAR. The ability of an issuer to take this approach was considered to be limited and fact specific, for example, where a substantive decision was truly being made the night before publication. The general view was that this approach should not be relied on as a general proposition.

Freshfields commented on a common theme it had seen in the context of results announcements, of companies involving brokers and investor relations. This was echoed by GC100 members.

The context specific nature of the decision about whether to label results as “inside information” was highlighted by the discussion around impairments. Two GC100 members confirmed that they had had experience of their company's results containing impairments and, based on the factual matrix, one member concluded that the impairment was not inside information and the other concluded that it was.

To deal with the potential need to announce its results early, the company which took the view that the impairment amounted to inside information, announced the impairment in advance of publishing its results. Consequently, the actual results announcement did not contain inside information and could be announced in line with its reporting timetable. The relevant GC100 member pointed out that, interestingly, the company's share price moved more after the results announcement than the announcement identifying the inside information.

The company which took the view that the impairment did not amount to inside information did so on the basis that, in view of the relative immateriality of the impairment in the context of a very large company, the impairment would not have a significant effect on price.

One GC100 member asked whether, if the view is taken that there is no inside information in a results announcement, a financial controller (who is not a PDMR) could trade in the company's shares on the day immediately before the results are announced. Although it was acknowledged that, if the decision on inside information was correct the financial controller could deal, Slaughter and May confirmed that it would advise such person not to deal.

Slaughter and May suggested that companies should assess the appropriateness and perception by the market of any dealings by employees in their shares and that, generally, companies should adopt a tough stance on dealings. A dealing shortly before an announcement that leads to a positive price movement would be judged with hindsight and against the clear policy to drive out insider dealing. Such a dealing might attract the attention of the FCA and the effort involved in satisfying the FCA that the decision to deal was made correctly is something that companies may want to avoid.

Similarly, where a CFO looks at a company's flash results, believes that the company's position is strong and then wishes to deal, would this be permitted? Slaughter and May takes the view that it would be very risky to allow the CFO do deal in such circumstances.

The general view was that, even if results or other sensitive information is not inside information, it would be inappropriate for a person in possession of such information to deal in the company's shares. Freshfields added that the ICSA/GC100/QCA dealing code (see MAR Dealing code and policy documents) had been formulated in order to ensure that persons with access to financial results and other sensitive information could be prohibited from dealing in the run up to their announcement. This was precisely to prevent the perception of people dealing at an inappropriate time, regardless of whether the information amounted to inside information.

In effect, companies should adopt a two-pronged approach: on the one hand they need to determine whether something amounts to inside information and on the other hand they need to determine whether it is appropriate for a person to deal. Slaughter and May confirmed that even if relevant information is not inside information, it may not be appropriate for a person in possession of such information to deal in the company's shares.

GC100 is the association of general counsel and company secretaries working in FTSE 100 Companies. Note that the views expressed in this article do not necessarily reflect those of each and every individual member of the GC100 or their employing companies.

Nothing in this article represents advice by the GC100 or any of its members, Practical Law, Thomson Reuters Professional (UK) Limited, Freshfields Bruckhaus Deringer LLP or Slaughter and May to any person and none of the GC100, its members, Practical Law, Thomson Reuters Professional (UK) Limited, Freshfields Bruckhaus Deringer LLP and Slaughter and May accepts any responsibility or liability to any person for or in respect of the article. It is the responsibility of individual companies to ensure that they understand, and comply with, the relevant requirements and to take specific external advice (legal or otherwise) as they deem appropriate.